Will The Natural Gas Market Continue To Heat Up?

The price of natural gas (short term delivery) declined during the first part of last week only to bounce back during the last two days of the week. According to the recent EIA report, last week's withdrawal from storage remained high for the season. Will the rise in natural gas's price continue? Let's analyze the latest developments related to the natural gas market.

During the previous week, the future price of Henry Hub (short term delivery) rose by 2.5%. Moreover, United States Natural Gas (NYSEARCA:UNG) also increased by 2.7%. As of last week, the Henry Hub future prices were nearly $1.99 per million BTUs higher than the price for the same week in 2012. The rise in the price of natural gas may have also helped curb the fall of shares of major natural gas and oil producers such Exxon Mobil Corporation (NYSE:XOM): During the previous week, Exxon's stock declined by 1.2%. If natural gas continues to rise it could raise the expected revenues of Exxon and thus positively affect the company's shares.

The chart below presents the shifts in the price of natural gas during February and April. As seen, natural gas prices had an upward trend in the past few weeks.

Click to enlarge

Storage

Based on the recent EIA weekly report, the underground natural gas storage fell by 94 Bcf to reach 1,687 Bcf. In comparison, the storage rose by 42 Bcf during the same week in 2012 and remained unchanged according to the five years average. The current storage for all lower 48 states is 31.6% below last year's storage and 2.1% below the 5-year average - the current storage level fell below the five year average for the first time this year. The table below shows the developments in storage from November to March (for twenty two weeks) in the last five years. As seen, the average extraction in 2012/3 is higher (in absolute numbers) than the average withdrawal in previous years except the 2010/2011 season. This means, the extraction season continues for a longer than normal time span.

Demand

From the demand side, during the previous week, the average U.S NG consumption changed course and fell by 16.3% but was 5.1% higher than the same week in 2012. The residential/commercial sector led the fall with a 25% drop (week over week) but was 39% higher than last year. Moreover, the power sector's demand also declined by 11.3% (week over week) and was 25% lower than last year's consumption. Finally, the industrial sector's demand fell by nearly 4.5% (W-o-W). As a result, the total demand for NG decreased by 16.2% compared to last week's. But the total demand was still 5.5% higher than the demand during the same week last year. Based on the above, the demand for natural gas contracted during last week compared to the demand for natural gas a week earlier but remained higher than last year's.

Supply

From the Supply side, the gross natural gas production slightly increased by 1% during the previous week; it was also 2.2% above the production in 2012. Conversely, imports from Canada fell last week by 5.6% (week-over-week); the imports were also 4% below the same week in 2012. The total U.S natural gas supply slightly rose by 0.30% compared to last week.

According to the EIA, the offshore production in the Gulf of Mexico continues to fall. One reason for this decline is the low natural gas prices and high oil prices that contribute to the shift in offshore production from natural gas to oil. Based on the recent weekly update by Baker Hughes, the natural gas rotary rig count fell again by 14 and reached 375 rigs. The rig count was nearly 42% below the number of rigs recorded during the same week in 2012.

So during the previous week, the natural gas supply slightly increased while the demand declined compared to the preceding week. In other words, the natural gas market loosened compared to the same week in 2012.

When will the Weather Heat Up?

During last week, the U.S temperatures (on a national level) were 6 degrees cooler than the 30-year normal temperature and 15.7 degrees cooler than the same week last year. The temperatures are projected to remain low in the Northeast in the next day or two. But in the following two weeks, the temperatures in the Northeast, Midwest and South are expected to reach higher than normal temperatures. Precipitation is expected to be above normal mainly in the North. On a national level, the heating degrees for this week are projected to be normal but higher than the heating degrees compared to the same week last year. The expected rise in temperatures in the U.S might lead to a normal demand for natural gas for heating purposes. Therefore, if the temperatures rise, we might see a decline in demand for natural gas, which could pull back the latest rise in natural gas prices. Finally, according on the updated three month outlook, the temperatures in the Northeast and Midwest are projected to reach above normal temperatures.

What's Up Ahead for Natural Gas?

The demand for natural gas declined last week but remained higher than last year. Moreover, the withdrawal from storage was still high compared to last year and compared to the 5-year average. But the temperatures in many regions in the U.S are expected to increase and reach above normal temperatures in the coming weeks. This might ease the demand for natural gas for heating purposes. The sharp rise in the prices of natural gas pulled down the demand for natural gas in the power sector. From the supply side, natural gas production remained stable. Based on the recent developments in supply and demand, the natural gas market slightly loosened compared to last week. Moreover, the expected to rise in temperatures might pull down the price of natural gas or at least curb its recent rise. If these weather projections turn out right, I guess the price of natural gas will change course and decline.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.